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Per Amundsen, Head of Research, Thinktank
For self-managed super funds (SMSF) advisers who have taken the effort to become qualified to advise on Limited Recourse Borrowing Arrangements (LRBAs), they have discovered an important and profitable business niche.
Although LRBAs are not for every SMSF, they have become a significant financial instrument for many trustees, their appeal growing in tandem with better understanding about how they can be used as a valuable part of a retirement income strategy and, often, an all-encompassing business plan.
What’s become apparent is that LRBAs offer investment strategy flexibility and not just to the SMSF. There are a range of options open to financial advisers with respect to LRBAs, just as there are for lenders. These options can include related-party LRBAs and “business real property” in specie contributions as part of the structure, for example.
Although advisers do face restrictions about giving advice on property and mortgages, it’s no more than brokers and lenders face with respect to giving financial advice. As a lender we are expressly precluded from giving advice, but we are still very much involved in delivering the best outcome for our borrowers. This often involves guiding clients to seek other professional advice and to be able to do this effectively we have to know which advisers are best suited to assist them.
Some LRBA-based investments are relatively straightforward, such as residential property. But even in these instances it typically involves more than one piece of specialist advice. Although there is a cost to advice, obtaining expert opinions can help insulate and optimise an LRBA investment.
For financial advisers who have carved out a niche with LRBAs, how this debt instrument will dovetail into their client’s investment strategy is something of which they will have detailed knowledge. Real estate agents and mortgage brokers also can have functional roles to play in terms of which property to buy and the financing.
In Thinktank’s opinion, a good mortgage broker can prove invaluable to the financial adviser because they can advise your client in areas that you can’t and vice versa. Even though LRBAs are the adviser’s area of expertise, the broker should still be aware of all the essential regulations imposed on this type of borrowing and they need to be accredited accordingly. This makes it easier for them to work with the adviser and client to deliver the best outcome.
Fortunately, this information is readily available from lenders such as Thinktank. The more advisers know about the product (typically property), the better result for their clients and, by extension, the deeper the adviser-client relationship.